Anonymous trading systems are known which allow traders to hide their true degree of interest from the market when they submit quotes to buy or sell the product traded on the system, typically a financial instrument. A quote is a visible order to buy or sell the product which is submitted into the system by a market maker and which is displayed to potential counterparties, sometimes subject to eligibility criteria such as bilateral credit between the parties. The quote will typically include the amount of the order, the price, and an indication as to whether it is a buy or a sell order. In anonymous trading systems the identity of the party submitting the quote is known to the trading system but is not shown to other parties on the system until a trade has been completed at which point the identity of the counterparties is released to each other.
It is of great importance to traders that they do not disclose their trading intentions to the market, as this could affect the market to their detriment. For example, if it was clear that a given trader needed to buy a very large amount of a particular product, the price of offers to sell that product submitted by third parties could rise, resulting in the trader having to buy at an inflated price. For this reason some trading systems have introduced the ability to submit quotes with a primary and a hidden or linked amount. A quote is submitted that has a primary amount which is displayed to the market and a linked amount which is not displayed. Thus the trader can conceal the true degree of their interest. One example of this type of order is disclosed in U.S. Pat. No. 5,136,501 of Reuters Limited. Another example is implemented on the EBS Foreign Exchange Dealing System provided by EBS Group Ltd of London, England. Both of these systems allow a quote to have a primary, visible, amount and a secondary linked amount which is invisible to traders. If a quote is matched for an amount more than the primary amount, a portion, or all, of the linked amount will also be dealt as necessary to fill the order. However, any remaining portion of the linked amount will be then be cancelled. Similarly, if the quote is dealt for the exact amount of the primary amount, the linked amount will be cancelled. If not all the primary amount is dealt, the remaining amount remains in the system together with the linked amount.
This approach to hidden or linked amounts allows maker orders to include linked amounts. Takers who submit invisible orders (hits) have no facility for submitting linked amounts. The manner in which hidden amounts work can be better understood from the following example. Consider a situation illustrated in FIG. 1 where a party A submits a quote consisting of an offer to sell for a primary amount of 5 (million) and a linked amount of 5 million. The primary amount is displayed to those counterparty trading floors with which there is sufficient bilateral credit to trade. Party A has the first quote in the market and is first in the queue. A second party B then submits an offer to sell for a primary amount of 20 at the same price a little after party A. Party B is second in the queue behind party A. A third party C then submits a bid to buy for 4 at the offer price. Because the system matches on price time priority, party C's bid will be matched with party A's offer. A deal is now pending between parties A and C with 4 million of party A's primary amount reserved in an initiated state. Finally, a fourth party, party D submits a buy bid for 25 at the offer price at a time after party C's buy. Party A has a pending deal with party C for 4 million, and only part of the primary amount initiated. Thus Party D is matched with party A for the remaining primary amount of 1 M and the linked amount of 5 M. A deal is now pending for 6 M between parties A and D. The deal between parties A and C is then completed and confirmed as a done deal. Party A's balance of 6 is not available for matching because the full primary amount (1 M) is in the initiated state. Thus, a match is made between parties B and D and a deal is pending between B and D for 19 M. The pending deal between A and D is then confirmed for 6 M (1 primary and 5 linked). Party A's original offer of 5 visible and 5 linked is now complete and is removed from the market. Next, the pending deal between B and D is completed and confirmed as done between B and D for 19. However, parties B's original offer for 20 has one remaining and that offer remains in the system as a live quote which is now at the top of the queue.
If, in the example above, the party C buy had been for 5, the entire primary amount of party A's offer would have been in a deal pending state. The remaining lined order for 5 could not have been matched with the party D buy order. When the party A and C deal was completed, the linked amount would have been cancelled. If the party A and C deal had failed, for example through lack of credit, both the primary and the linked amounts of party A's offer would have again been available for matching.